ACI’s 2016 Compliance Series
As we develop new products for appraisers, compliance with industry standards is always front and center. Our objective is to help improve appraisal quality and provide efficiencies to the process. Everybody wins by connecting industry needs with appraisal reporting techniques through technology, industry guidance, and practical advice. This is ACI’s contribution to the industry – and we hope you find it informative and helpful. Enjoy.
I’ll begin this new series with the topic of Sales Contract Analysis. This blog is written in the context of mortgage lending assignments reported on Fannie Mae or Freddie Mac (GSE) forms, which, to be concise, I’ll refer to as “GSE assignments.”
The governing rule in USPAP regarding contract analysis is STANDARDS RULE 1-5, which states:
Lines 626 and 627 speak to the circumstances under which the RULE applies. The first circumstance is if the value opinion to be developed is market value and the second is if the contract is available in the normal course of business.
In GSE assignments, the opinion to be developed is market value, as stated on the pre-defined forms.
The second circumstance, if the contract is available in the normal course of business, requires an understanding of the meaning of the term “normal course of business.” For a fuller understanding of the term as it’s used in USPAP, refer to Advisory Opinion 24, the gist of which is basically:
- What are the expectations of parties who are regularly intended users for similar assignments? In other words, what do your clients expect of you in a given situation?
- What would your peers (appraisers who have expertise and competency in a similar type of assignment) do in a given situation?
If a lender plans on selling a loan to Fannie Mae or Freddie Mae, the lender must abide by the agency’s Selling Guide. For purposes of illustration, I’ll quote from the current version of Fannie Mae’s Selling Guide. In section B4-1.1-05, titled Disclosure of information to Appraisers, the Selling Guide states:
The above paragraph makes it clear that Fannie Mae requires the lender to provide the appraiser a copy of a complete, ratified sales contract with all addenda. If the contract is amended, the lender is required to provide the appraiser with the updated version.
There should be few, if any situations in a GSE assignment where an appraiser does not receive a copy of the contract. Perhaps you are thinking, "What am I expected to do if the lender simply won’t provide a copy of the contract? Or if the lender tells me to contact the selling or listing agent and the agent is not responding to my requests while at the same time the AMC is badgering me to complete the report?" In a GSE transaction, an often-fruitful solution to this issue is to point out to the uncooperative party that if you can’t obtain a complete copy of the sales contract you will have to check the "did not analyze" check box on the form. As a result, the appraisal report will receive a "hard stop" when it arrives at the Uniform Collateral Data Portal and the lender will be notified the report is unacceptable.
If your experience has been like most appraisers, obtaining a copy of the contract is not as much of an issue as it was prior to the inception of the Uniform Appraisal Dataset (UAD) and the accompanying Uniform Collateral Data Portal. Once it was clear to lenders that if they wanted to sell the loan to Fannie or Freddie, they became more cooperative with regard to providing a copy of the sales contract to the appraiser.
While lenders are more aware of the requirement to provide a contract to the appraiser, some appraisers report an increase in the amount of “incomplete paperwork” they are receiving as opposed to a complete contract. The reason for the term “incomplete paperwork” is that there is really no such thing as an “incomplete” contract.
If the lender or Realtor supplies you with some paperwork that is not signed by all parties, lacks addenda, or is incomplete in any way, you don’t have a contract, just some of the paperwork involved in the transaction.
Note the excerpt from the Fannie selling guide above requires the lender to provide the appraiser with a copy of the complete, ratified sales contract and all addenda. So what is a “complete, ratified sales contract with all addenda?”
“Complete” and “all addenda” may seem to go hand in hand but there are a few distinctions. Understand that a “contract” for the sale of real estate usually begins as an “offer” from a prospective buyer. If the seller accepts and signs a written offer signed by the buyer, it becomes a contract. However, in many cases the seller does not sign the original offer but presents a counteroffer.
It’s usually not too difficult to determine if a copy of the contract (without addenda) appears complete. The pages are typically numbered with the last page being the signature page. It’s difficult to know, however, if “all addenda” are present. Unforeseen circumstances can occur that result in addenda being created after the contract is signed. If these circumstances result in a price that’s lower than the original offer, some of the parties involved in the transaction may feel it is to their advantage to allow the appraiser to think the sale is taking place at a higher price than is actually the case.
As an example, suppose a complete (at the time) contract is presented to the appraiser immediately after all parties sign. The contract (with no addenda) reports a sale price of $240,000 with standard contingencies for various inspections. Unknown to the appraiser, one of the inspections conducted subsequent to the contract date discovers an unapparent problem, in this case a failed sewage disposal system, with an estimated replacement cost of $20,000. The seller agrees to either repair the failed system at the existing contract price or to lower the price to $220,000 and sell the property “as-is.” Consequently, the buyer agrees to accept the property “as-is” for $220,000 and an addendum to the original contract is signed but not presented to the lender or appraiser.
While in the example above, the appraiser may have no way of knowing that any addenda existed, as a liability measure, many appraisers will report the total number of pages analyzed. In the example above, the appraiser’s summary of analysis may read (in part) that "a 14 page sales contract with no addenda, dated 12/23/2015, was provided to the appraiser." This may help to insulate the appraiser from liability in the event of undisclosed addenda and helps fulfill the appraiser’s USPAP obligation to communicate the appraisal report to intended user(s) in a manner that’s meaningful. Otherwise, it can be argued, the appraiser did not provide sufficient information to inform the indented user(s) specifically what was analyzed.
The term "ratified" means more than simply signed or initialed. It means "formally approved and invested with legal authority" 1 as opposed to simple acknowledgement. Depending on how the contract is written, ratification may take place as soon as all parties have signed the offer (or counteroffer(s), as may be the case) or it may not take place until all contingencies have been removed or expired. Few appraisers are attorneys with the ability to distinguish “signed” from "ratified," so this raises a question in referencing a "ratified" contract in the summary of analysis. Some appraisers feel more comfortable simply referring to a "signed" contract.
In our next post I’ll continue on with our discussion on Contract. Namely I’ll explore the difference between reciting facts and summarizing your analysis, and a continuation of the components within the Contract section. Until next time!
American Heritage® Dictionary of the English Language, Fifth Edition. Copyright © 2011 by Houghton Mifflin Harcourt Publishing Company.